handling fees. Gross written premium and inward reinsurance premiums Premiums are accounted for as income when the risk related to the insurance policy incepts and are recognised over the risk period of the contract by using an unearned premium reserve where necessary. Gross premiums include premiums received in terms of inward reinsurance arrangements. Gross premiums exclude value added tax and are shown before the deduction of direct acquisition costs. Deferred acquisition cost (DAC) Commissions that are related to securing new contracts and renewing existing contracts are deferred over the period in which the related premiums are earned, and recognised as a current asset. All other costs are recognised as expenses when incurred. Provision for unearned premium reserve (UPR) The Unearned Premium Reserve represents the portion of the current year’s premiums that relate to risk periods extending into the following year. The portion of unearned premium is calculated using the 365th method. Provision for unexpired risk Provision is made for underwriting losses that may arise from unexpired risks when it is anticipated that unearned premiums will be insufficient to cover future claims (including claims handling fees and related administrative costs). This liability adequacy test is performed annually. Outstanding Claims Reserve (OCR) Provision is made for the estimated final cost of all claims that had not been settled on the accounting date, less amounts already paid. Claims and loss adjustment expenses are based on the estimated liability for compensation owed to insurance contract holders or third parties damaged by insurance contract holders. The claims reserve includes an estimated portion of the direct expenses of the claims and assessment charges. The outstanding claims reserve is not discounted. Provision for claims incurred but not reported (IBNR) Provision is also made for claims arising from insured events that occurred before the close of the accounting period, but which had not been reported to the Group at that date or up to the date of preparation of the annual financial statements. This provision is calculated using actuarial modeling (refer to note 14.1). This reserve is undiscounted. Gross IBNR uses actuarial projections, a frequency severity approach or a formula based calculation. Once sufficient claims history has been developed, actuarial techniques will be applied to determine the IBNR for all business segmentations. The frequency severity approach is used for the Health Professions Indemnity business. The frequency and severity assumptions result in a calculated best estimate IBNR plus a risk margin. The implicit risk margin is expected to result in an IBNR calibrated at least at a 75th percentile. Assumptions are regularly reviewed and updated as experience emerges. The factor based approach considers the Earned Premium (EP), excluding VAT, per line of business and development year where sufficient data is not available to perform actuarial projections. In addition, a risk factor per line of business and 4. Insurance and investment contracts (continued) 4.2 Valuation and recognition (continued) 4.2.2 Short-term insurance contracts (continued) 113 Group Accounting Policies
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