Actuarial Terminologies for General Insurance
Let's discuss some of the Actuarial Terminologies specific to General Insurance:
Gross
Direct Premium : Premium received from direct business written
Gross
Written Premium : Gross Direct Premium + Premium received on
reinsurance accepted
Net
Premium: Gross Written Premium- Premium paid on reinsurance
ceded.(by ceded we can say passed)
These three are very simple and related to
each other. Now lets move further towards claims.
Gross
Claims Paid: Claims paid on direct business written + Claims
paid on reinsurance accepted.
Net
Claims Paid: Gross Claims Paid - Claim amount received from
reinsurance ceded(i.e. passed)
These two are also very simple. Lets move
further to Commissions.
Gross
Commissions: Commission paid on direct written business +
Commission paid on reinsurance accepted.
Net
Commission: Gross Commission - Commission received with respect
to reinsurance ceded.
"So what happens basically is that when
as an insurer, i take a reinsurance then reinsurer will pay me commission
because i am bringing a business for him (such as in case of quota share reinsurance). So that's why reinsurer will pay me
commission and i deduct that from the net commissions to come at a result that
how much i am paying a commission" SEEMS EASY!!
Net
Earned Premium(NEP) : Net Premium +/- Adjustment for changes in
reserve for unexpired risk(i.e. URR, we will come to that what it is)
OR Premiums received from direct business
written + Premium received from reinsurance accepted - Premium paid on
reinsurance ceded +/- change in URR = NEP
Net
Claims Incurred: Net Claims paid + Claims outstanding at the
end of the year - Claims outstanding at the beginning of the year
OR Claims paid on gross business written +
claims paid on reinsurance accepted business - claims amount received from
reinsurance ceded + change in Claims O/S.
When i was talking about Commissions paid on
Direct Business, it means commissions paid to brokers, agents, corporate
agencies and web aggregators.
Loss
Ratio : Incurred Claims / Earned Premium. It can be bifurcated
into gross or Net. Companies usually specifically mentions in their financials
whether its gross or net
Retention
Ratio: Net Written Premium / Gross Written Premium
Solvency
Ratio: ASM / RSM, where SM means Solvency Margin. A= Actual and
R = Required. In India insurance industry solvency should be minimum 150% or
1.5
Underwriting
Profit: Net Earned Premium - Net incurred claims +/- Net
commissions - Operating expenses.
Ahh!! Expenses
Okay so we divide into Two parts basically
ALAE and ULAE.
ALAE:
Allocated Loss Adjustment Expense: Which can be allocated to a specific claims
for example fees paid to loss adjusters, legal counsels
ULAE:
Unallocated LAE. Which cannot be allocated to a specific claims. Example:
Salaries, rent and computer expenses of claims department.
"Now
as Promised Lets Talk about URR"
For that lets understand how earned premium
comes?
I have to prepare my financials on 31st
March 2019. Now I sold one policy for 1 year on 1 Feb 2019 for Rs.1200. So at
31st March 2019 i have earned 200rs premium (1200*2/12). I have done that calculation
on the assumption that exposure remains constant throughout the policy period,
however it will not be case in some policies.
So what about the rest rs.1000 (1200-200).
That will be my Unearned Premium.
Unearned
Premium Reserve: A reserve for Unexpired risks shall be created
as the amount representing that part of the premium written which i
attributable to and to be allocated to the succeding accounting periods.
But lets say we do our analysis and it comes
to know that Remaining unearned premium is not sufficient for Expected Claims
costs (inclusive of expenses). Then it means premium is not enough so i have to
make the reserve for the same. Thats where Premium Deficiency comes.
Premium
Deficiency Reserve: Premium Deficiency shall be recognized if
the sum of expected claim costs, related expenses and maintenance costs exceeds
related reserve for Unearned Premium reserve. As per IRDAI, we recognized where
deficiency is at entity level.
So what is URR
URR = UPR + PDR.
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