NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) for the year ended 31 December 2022 14. Short-term insurance policy liabilities 14.1 Short-term insurance contracts – assumptions Unearned premium reserve Unearned premiums represent the proportion of premiums written in the current year, which relate to risks that have not expired by the end of the financial year. The Group recognises a reserve for unearned premiums on a basis that reflects the underlying risk profile of its insurance contracts. An unearned premium reserve is created at the commencement of each insurance contract and is released as the risk covered by the contract expires. The unearned premium reserve is released evenly over the period of insurance using a time proportion basis. The unearned premium reserve is first determined on a gross level and thereafter the reinsurance impact is separately recognised based on the relevant reinsurance contract(s). Deferred acquisition costs and Reinsurance commission revenue are recognised on a basis that is consistent with the related provision for unearned premiums. At each reporting date an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision can be recognised, based on information available at the reporting dated for any estimated future underwriting losses relating to unexpired risks (unexpired risk reserve). Unexpired risk provision If the expected value of claims and expenses attributable to the unexpired periods of policies in force at the statement of financial position date exceeds the unearned premiums provision in relation to those policies, after deduction of any deferred commission expenses, management assesses the need for an unexpired risk provision. The need for an unexpired risk reserve is assessed on the basis of the information available at the reporting date. Claims events occurring after the reporting date in relation to the unexpired period of policies in force at the time are not taken into account in assessing the need for an unexpired risk reserve. Management will base the assessment on the expected outcome of those contracts, including the available evidence of claims experience on similar contracts in the past year, as adjusted for known differences, events not expected to recur, and the normal level of seasonal claims. Outstanding claims reserve (OCR) The OCR represent the Group’s estimate of the cost of settlement of claims that have occurred and were reported by the reporting date, but that have not yet been finally settled. The case estimates on direct business written for commercial and personal lines, are determined by the outsourced claims function, based on previous claims experience, knowledge of events, the terms and conditions of the relevant policies and on the interpretation of circumstances. Each notified claim is assessed on a separate case-by-case basis with due regard for the specific circumstances, information available from the insured and/or loss adjuster, past experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the levels of unpaid claims, legislative changes, judicial decisions and economic conditions. The claims function employs employees experienced in claims handling and rigorously applies standardised policies and procedures to the claims assessment process.The Health Professions Indemnity line of business follows a similar approach. This function is performed in-house and legal advice is obtained as and when required. The ultimate cost of reported claims may vary as a result of future developments or better information becoming available about the current circumstances. Therefore, case estimates are reviewed regularly and updated when new information becomes available. The provision for outstanding claims is initially estimated at a gross level. A separate calculation is performed to estimate reinsurance recoveries. The calculation of reinsurance recoveries considers the type of risk underwritten, the year in which the loss claim occurred, under which reinsurance programme the recovery will be made, the size of the claim and whether the claim was an isolated incident or formed part of a catastrophe reinsurance 142 Notes to the Consolidated Financial Statements
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