Unexpired risk reserve

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Unexpired risk reserve
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Unexpired risk reserve (URR) "is defined as a prospective assessment of the amount that needs to be set aside in order to provide for the claims and expenses which will emerge from unexpired risk and which is ove and aboce the unearned premium reserve pertaining to the same risk as the same valuation date"[1]. URR is expressed as an sum of the values of anticipated future expenditures less "current claim reserve, current contract reserve, present value of future earned premiums, and the current balance sheet accrual for future expenses to the extent related to the future expenses that are included in the calculation of the deficiency" and the anticipated value of future claims[2]

Unexpired risk reserve in some sources is called also Additional Amount for Unexpired Risk or Premium Deficiency Reserve[3].

Elements of unexpired risk reserve

The basis of the URR calculation is to take into account the following factors that may affect the level of reserves[4]:

  • Forecast of future claims,
  • Forecast of future expenses,
  • Unearned premiums reserves.

Therefore, unexpired risk reserve is expressed by the formula:

\(URR = max\{(E[claims] + E[expenses] + DAC - UPR), 0\}\)

Where:

  • URR - unexpired risk reserve,
  • E[clamins] - occurring after the date of valuation predicted claims in the remaining period of insurance,
  • E[expenses] - occurring after the date of valuation predicted administration expenses in the remaining period of insurance,
  • DAC - "deferred acquisition costs related to premiums that are being considered for calculation of unearned premium"[5],
  • UPR - unearned premiums reserves - retained at the end of the accounting period, a part of the income that is cover to take unexpired risk.

URR in accounting

"The treatment of reserve for unexpired risk in the final accounts of an insurance company is as follows[6]:

  • If it appears only in the trial balance, it should be taken to the liabilities side of the balance sheet.
  • If it appears as an adjustment, it should be charged to the revenue account and shown also on the liabilities side of the balance sheet.
  • If it appears in the trial balance and also as an adjustment, the difference of the two (i.e. Desired Reserve for Unexpired Risk at end less Reserve for Unexpired Risk in the beginning) should be taken to Revenue Account The Desired Reserve for unexpired Risk at end should be shown on the liabilities side of the balance sheet. The treatment for any additional reserve for unexpired risk, would also be on the same pattern"

Footnotes

  1. Pavlović B., (2012),
  2. Robbins E. L. & Bush R. N., (2015), p. 324,
  3. Hindley D., (2017), p. 5,
  4. Pavlović B., (2012),
  5. Pavlović B., (2012),
  6. Maheshwari S.N. & Maheswari S. K., (2009),

References

Author: Wojciech Musiał