I came across a statement in a reserve estimation report for a general insurance company saying " We have been advised that all short tail products have premiums paid monthly hence unearned premiums reserves was deemed nil." My question is what is the reasoning behind it being deemed nil.
The are probably assuming that reserves are set at the end of the month (which is the end of the accounting period as well) just before the next month's premiums. There should theoretically not be holding any unearned premiums if that's the case. Naturally some of next months premiums may have been received in practice (probably reflected in the current liabilities if the cash at bank reflects them). Normally unearned premiums are calculated when the written premiums are paid in advance for periods longer than a month for example quarterly/yearly and the end of the accounting period falls in the middle of the period.
I would have thought that it also has to do with the fact that they are "short tailed products" - meaning claims are reported quickly and settled quickly by the insurance company. So if claims are settled quickly, my thought would be that there's no need to reserve for them. The whole idea of reserving is to be able cover claims primarily.. but I could be wrong.
As we are talking about UPR it is a question of how much risk in unexpired at the end of the month. If the UPR is zero it means that I have earned the monthly premium. This would only make sense if all the premiums were received on the first day of the month so there is no remaining cover at the end of the month so our UPR is set to zero.
Not holding reserves because claims are ‘settled quickly’ is dangerous and erroneous. Wanted to flag in the spirit of helpfulness .
Thank you all for your reponses. I was thinking along the lines of mugono that will it not cause for there to be low reserves overall and lead to the event that the the insurer will not be able to meet claims. Or that will will be catered for in the IBNR?
As Gemma says the UPR is held in respect of premium that has been written but not yet earned. If the exposure for which the premium has been written has all passed ( ie been earned) then you shouldn't need an UPR, but since claims will have been incurred in this period you will probably need a reported claims reserve for the claims that have been reported to you but not yet paid and an IBNR reserve for claims than have been incurred but not yet reported to you.
