PPS Integrated Report 2021 171 | Notes to the Consolidated Financial Statements 14. SHORT-TERM INSURANCE POLICY LIABILITIES 14.1 Short-term insurance contracts – assumptions Unearned premium reserve Unearned premiums represent the proportion of premiums written in the current year, which relate to risks that have not expired by the end of the financial year. The Group recognises unearned premiums on a basis that reflects the underlying risk profile of its insurance contracts. An unearned premium reserve is created at the commencement of each insurance contract and is released as the risk covered by the contract expires. The unearned premium reserve is released evenly over the period of insurance using a time proportion basis. The unearned premium reserve is determined on a gross level and thereafter the reinsurance impact is separately recognised based on the relevant reinsurance contract(s). Deferred acquisition costs and Reinsurance commission revenue are recognised on a basis that is consistent with the related provision for unearned premiums. At each reporting date an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision can be recognised, based on information available at the reporting dated for any estimated future underwriting losses relating to unexpired risks (unexpired risk reserve). Unexpired risk provision If the expected value of claims and expenses attributable to the unexpired periods of policies in force at the statement of financial position date exceeds the unearned premiums provision in relation to those policies, after deduction of any deferred commission expenses, management assesses the need for an unexpired risk provision. Management will base the assessment on the expected outcome of those contracts, including the available evidence of claims experience on similar contracts in the past year, as adjusted for known differences, events not expected to recur, and the normal level of seasonal claims. Outstanding claims Outstanding claims represent the Group’s estimate of the cost of settlement of claims that have occurred and were reported by the reporting date, but that have not yet been finally settled. Claims provisions are determined based on previous claims experience, knowledge of events, the terms and conditions of the relevant policies and on the interpretation of circumstances. Each notified claim is assessed on a separate case-by-case basis with due regard for the specific circumstances, information available from the insured and/or loss adjuster, past experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the levels of unpaid claims, legislative changes, judicial decisions and economic conditions. A separate calculation is performed to estimate reinsurance recoveries where applicable. The calculation of reinsurance recoveries considers the type of risk underwritten, the year in which the loss claim occurred, under which reinsurance programme the recovery will be made, the size of the claim and whether the claim was an isolated incident or formed part of a catastrophe reinsurance claim. Claims incurred but not reported (IBNR) There is also considerable uncertainty concerning the eventual outcome of claims that have occurred but had not yet been reported to the insurer by the reporting date. The IBNR provision relates to these events, as well as potential movements in existing case estimates. Separate assessments are performed per line of business and the IBNR reserves are raised to at least be sufficient at the 75th percentile level. The appropriate reinsurance structures are applied to the gross IBNR to calculate the reinsured portion of the IBNR. Adjustments to the amounts of claims provisions established in prior underwriting years are reflected in the Financial Statements for the period in which the adjustments are made.
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