Reserves in General Insurance
Money held back for premium not yet earned and claims not yet paid, or not yet reported.
A general insurer collects premium today for cover that runs into next year, and pays claims months or years after the accident. At any balance sheet date, part of the premium has not yet been earned, and part of the claims cost has not yet been paid, or even reported. Reserves are the liabilities that hold money back for both.
IRDAI sets the rules in its Actuarial, Finance and Investment Functions of Insurers Regulations, 2024. Reserves fall into two families: reserves for the unexpired part of policies (unexpired risk reserves) and reserves for claims that have already happened (claims reserves).
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The Reserves, as IRDAI Defines Them
- Unearned premium reserve (UPR)
- The part of premium written that belongs to later accounting periods.
- Premium deficiency reserve (PDR)
- An extra reserve when expected claims, expenses and maintenance costs for the unexpired period exceed the UPR. Recognised at the insurer level, never below zero.
- Unexpired risk reserve (URR)
- UPR plus PDR.
- Outstanding claims reserve
- Provision for all reported claims not yet settled, including allocated claim expenses such as surveyor and legal fees.
- IBNR (incurred but not reported)
- Claims that have happened but the insurer has not yet been told about, plus claims in transit and reopened claims. In IRDAI's definition, IBNR includes IBNER.
- IBNER (incurred but not enough reported)
- The expected change in estimates of claims already reported: a reported claim reserved at ₹5 lakh that will finally cost ₹8 lakh.
How UPR Is Calculated
| Business | IRDAI method |
|---|---|
| Marine hull | 100% of net written premium of the preceding twelve months |
| All other segments | Either 50% of net written premium of the preceding twelve months, or the proportion of the unexpired period to the total period of each policy (the 1/365 method) |
| Change of method | The insurer must apply its method consistently; a change needs the regulator's prior written approval |
Worked Example: The 1/365 Method
A one-year fire policy starts on 1 January 2026 with net premium of ₹36,500. At the financial year end, 31 March 2026, 90 days have run and 275 days remain. UPR = ₹36,500 × 275 ÷ 365 = ₹27,500. Only ₹9,000 is earned in this year's accounts. Under the 50% method the insurer would instead hold half of the year's total net written premium for the segment, which is accurate only if policies are written evenly through the year.
Marine hull is the exception: the whole of the preceding twelve months' net written premium is held as UPR at the year end. It is the single most tested number in this chapter.
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Claims Reserves and the Chain Ladder
Known outstanding claims are provided in full, case by case, with allowance for inflation and settlement patterns, or by a statistical method where the Appointed Actuary judges that better. IBNR must be estimated by actuarial methods for each year of occurrence, both gross and net of reinsurance, without discounting, and certified by the Appointed Actuary.
The most common tool is the chain ladder, also called triangulation. Claims for each accident year are laid out by development year in a triangle. The actuary works out how claims typically grow from one development year to the next, applies those factors to fill the empty lower half of the triangle, and the difference between projected ultimate claims and what is already known is the IBNR. Long-tail lines such as motor third party and liability, where claims take years to surface and settle, tend to carry far more IBNR than fire or cargo.
What Changed in 2026
From 1 April 2026, IRDAI requires insurers to prepare Ind AS financial statements, which measure insurance contracts under Ind AS 117. For the first two years insurers must also prepare the older Schedule II financial information, including UPR on the rules above, and disclose it on their websites; an insurer could seek one year's forbearance. The IC-11 courseware (Revised Edition 2023) predates this and describes the older framework, which is what the exam tests.
How IC-11 Tests This
Expect: what IBNR stands for; which reserve exists because policies do not all expire at the year end (UPR); the marine hull UPR rule (100% of NWP); which reserve covers premiums that turn out inadequate for the unexpired risk (unexpired risk reserve or premium deficiency); and the chain ladder as the triangulation tool. The trap is mixing up IBNR (not yet reported) with IBNER (reported, under-reserved).
FAQs
What is unearned premium reserve in general insurance?expand_more
The part of premium written that relates to the unexpired part of policies at the balance sheet date. IRDAI allows 50% of net written premium or the 1/365 method; marine hull is reserved at 100% of net written premium.
What is IBNR in insurance?expand_more
Incurred but not reported: a reserve for claims that have already happened but have not yet been reported to the insurer. It is estimated by the Appointed Actuary using methods such as the chain ladder.
What is the difference between IBNR and IBNER?expand_more
IBNR is for claims not yet reported at all. IBNER is for claims already reported whose current estimate is too low. IRDAI's definition of IBNR includes IBNER.
What is premium deficiency reserve?expand_more
An additional reserve held when the expected cost of claims and expenses for the unexpired period of policies is more than the unearned premium reserve.
Next steps
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