Determining the Premium Liabilities

Every nonlife insurance company and reinsurance company supervised by the Insurance Commission is required to maintain reserves for its written policies, which shall be charged as a liability in any determination of its financial condition, in accordance to Sections 219 and 220 of the Amended Insurance Code, as well as the Valuation Standards for Non-Life Insurance Policy Reserves.

In the nonlife insurance business, there are generally three types of reserves. These are: a) the unearned premium reserves (UPR); b) loss and loss adjustment (Loss Reserves); and c) “Incurred but not reported” reserves. However, terminologies, classifications and practices vary among different jurisdictions. In the Philippines, the Policy Reserves has been referred to as the aggregate of two types of reserves, the Premium Liabilities and Claims Liabilities.

Premium Liabilities “refer to all future claim payments and related expenses for policy maintenance and claims settlement, to be made after the valuation date, arising from future events for which the company is liable under its insurance contracts, and is computed on both gross and net of reinsurance basis.” Its definition is pretty much the same as that of a Loss Reserve.

Claims Liabilities, on the other hand, “refer to claims incurred but not yet paid as of valuation date for both the company’s direct and assumed reinsurance business, whether treaty or facultative. It includes claims due and unpaid, claims in the course of settlement, resisted claims and those which are incurred but not reported at a designated level of confidence, as well as direct and indirect expenses related to settling all outstanding claims, whether reported and unreported, as of valuation date.” This will not be discussed here.

Previously and as a temporary accommodation in view of the financial impact, the Insurance Commission, in a letter dated December 29, 2016, to the Philippine Insurers and Reinsurers Association (Pira), provided a relaxed implementation: “For 2017, companies shall be allowed to set up as Premium Liabilities the Unearned Premium Reserves instead of the higher of the UPR and the unexpired risk reserves [URR] where the UPR is determined in accordance with Section 7.2 of the said Circular. Starting 2018, the Premium Liabilities shall be determined in accordance with the valuation standards prescribed under the said Circular.” This is a reiteration of CL 2016-69, dated December 28, 2016.

Determining the Premium Liabilities:

Aggregate basis

Under the old “Valuation Standards for Non-Life Insurance Policy Reserves” under Section 7.1 of CL 2016-67, premium liabilities “for each class of business” in the non-life “shall be determined as the higher of UPR and URR.” It was proposed by ASP in 2018 that an aggregate approach be adopted in the calculation of the premium liabilities instead of a by line of business approach so that any deficiency in one line can be offset by excess premium reserves in other lines. Under CL 2018-18, dated March 9, 2018, the proposal of the ASP was adopted as it was provided that the premium liabilities shall be determined on an aggregate basis.

UPR net of DAC

In looking at the UPR, the Actuarial Society of the Philippines, in a letter dated January 26, 2018, proposed that it be net of Deferred Acquisition Cost. Pira objected to ASP’s proposal for the UPR to be computed net of DAC. Pira argued in its February 27, 2018, letter to the Commission that this “will eventually increase the premium liabilities and may even create deficiency reserves, resulting in unfavorable impact [and] additional financial burden to the nonlife companies.” The proposal of the ASP was likewise adopted such that the UPR shall now be net of the DAC.

Computing the Premium Liabilities

The difference between the URR and the UPR is an additional reserve set up by the companies called the Premium Deficiency. Under CL 2018-18, “a computation should be performed to determine whether the UPR required is greater or smaller than the UPR net of DAC. If the URR is greater, then the difference should be booked as an additional reserve on top of UPR. Therefore, Premium Liabilities is equal to the UPR plus the difference between the URR and the UPR net of DAC, if the URR is greater than the UPR net of DAC. Otherwise, it is equal to the UPR.”

Unexpired risk reserve, on the other hand, is defined in the Valuation Standards for Non-Life Insurance Policy Reserves (CL 2018-18) as “the amount of reserve required to cover future claims and expenses, at a designated level of confidence, that are expected to emerge from an unexpired period of cover” (Section 3.1.4.2).

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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.