Technical provisions: background: Unexpired Risks Provision: discounting
The 2005 ABI SORP (GIM2050) permits taking account of the investment income on assets representing technical funds in the calculation of a provision for unexpired risks. Paragraph 122 of the SORP says that
‘In calculating the expected value of future claims in relation to the unexpired periods of risk on policies in force at the balance sheet date, the future investment return arising on investments supporting the unearned premiums and unexpired risks provisions may be taken into account… The investment return will be that expected to be earned by the investments held until the future claims are settled.’
Similarly paragraphs 19 and 20 of Appendix 9.2 in Volume II of the Financial Services Authority’s sourcebook IPRU(INS) provide that where the URP has been determined after taking into account the expected investment return a note on the ’discounting’ adjustment is required. It appears to be common practice for companies to take advantage of this option, so that unexpired risks reserves are frequently calculated on something equivalent to a discounted basis.