Q&A

Question

Guideline 68 – future premium cash-flows versus premium receivable

1.122.Insurance and reinsurance undertakings should establish the future premium cash-flows contained within the contract boundaries at the valuation date and include within the calculation of its best estimate liabilities those future premium cash-flows which fall due after the valuation date.

1.123.Insurance and reinsurance undertakings should treat premiums which are due for payment by the valuation date as a premium receivable on its balance sheet until the cash is received.



Technical Annex III - Simplification for premium provisions

Simplification to derive the best estimate for premium provision based on an estimate of the combined ratio in the line of business in question:

The following input information is required:

(a) estimate of the combined ratio (CR) for the line of business during the run-off period of the premium provision;

(b) present value of future premiums for the underlying obligations (as to the extent to which future premiums fall within the contract boundaries);

(c) volume measure for unearned premiums; it relates to business that has incepted at the valuation date and represents the premiums for this incepted business less the premiums that have already been earned against these contracts (determined on a pro rata temporis basis).



The best estimate is derived from the input data as follows:

BE = CR x VM+ (CR-1) x PVFP + AER x PVFP



Where:

- BE = best estimate of premium provision.

- CR = estimate of combined ratio for line of business on a gross of acquisition cost basis i.e. CR = (claims + claim related expenses) / (earned premiums gross of acquisition expenses).

- VM = volume measure for unearned premium. It relates to business that has incepted at the valuation date and represents the premiums for this incepted business less the premium that has already been earned against these contracts. This measure should be calculated gross of acquisition expenses. PVFP = present value of future premiums (discounted using the prescribed term structure of risk-free interest rates) gross of commission.

- AER = estimate of acquisition expenses ratio for line of business.



The combined ratio for an accident year (= occurrence year) is defined as the ratio of expenses and incurred claims in a given line of business or homogeneous group of risks over earned premiums. The earned premiums should exclude prior year adjustment. The expenses should be those attributable to the premiums earned other than claims expenses. Incurred claims should exclude the run-off result, that is they should be the total for losses occurring in year y of the claims paid (including claims expenses) during the year and the provisions established at the end of the year.



Alternatively, if it is more practicable, the combined ratio for an accident year may be considered to be the sum of the expense ratio and the claims ratio. The expense ratio is the ratio of expenses (other than claims expenses) to written premiums, and the expenses are those attributable to the written premiums. The claims ratio for an accident year in a given line of business or homogeneous group of risks should be determined as the ratio of the ultimate loss of incurred claims over earned premiums.



Our understanding is that the UPR part of premium provisions should not include any negative premium cash-flows.

Could EIOPA confirm our understanding ?  It is important for the comparison of premium provisions across insurance undertakings and for the computation of operational risk.

EIOPA answer

This answer assumes that "UPR" means "Unearned Premium Reserve" and that it is equivalent to "VM = volume measure for unearned premium".



This volume measure is calculated by subtracting to the written premium of a given contract, the premium already earned at the valuation date. Its calculation does not require the projection of cash-flows specified in Article 28 of the Delegated Regulation 2015/35.