Short-Term Insurance Act, 1998 (Act No. 53 of 1998)Prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers4. Valuation of liabilities |
| 4.1 | Method of calculating the unearned premium provision (UPP) |
| 4.1.1 | In respect of policies, other than reinsurance policies, the minimum amount of the unearned premium provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula- |
(A - B) x (1 - C/D) + E
in which formula-
A - represents the gross premium (excluding VAT) as stipulated in the policy document for the full term of the policy, irrespective of the frequency of the premium payment, under all of the policies concerned for the whole of the period for which each of those policies is operative.
B - represents the sum of the following under all of the policies concerned for the whole of the period for which each of those policies is operative.
| a) | the total amount of so much of those premiums as has been refunded as a result of the cancellation or variation of the policy; and |
| b) | the total amount payable by the insurer as premiums under approved reinsurance policies in respect of the policies concerned; and |
| c) | the amount of the consideration, payable by the insurer in terms of section 48(1) of the Act to independent intermediaries in respect of-the policies concerned, reduced by the total amount of any consideration payable to the insurer in respect of approved reinsurance policies under which its liabilities in respect of the policies concerned are reinsured: Provided that such reduction shall not exceed an amount equal to the maximum consideration which would have been payable to an independent intermediary in terms of section 48 of the Act had those contracts been policies other than reinsurance policies. |
C - represents the number of days in the period from the date of the commencement of the incidence of risk under the policy until the day on which the calculation is made in accordance with this paragraph.
D - represents the total number of days during the whole period for which the risk is covered under the policy.
E - represents the total reserve for any type of cash-back bonus where this reserve is calculated as follows:
| a) | the percentage cash-back bonus stipulated in the policy document must be reserved for in full in respect of each premium received in respect of which a cash-back bonus will become payable in accordance with the policy document; |
| b) | the reserve can only be released either when: |
| i) | the liability ceases to exist; or |
| ii) | the benefit is paid out to the policyholder. |
| 4.1.2 | In respect of reinsurance policies, the minimum amount of the unearned premium provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula- |
(A - B) /2
in which formula –
A - represents the gross premium for the full term of the policy, irrespective of the frequency of the premium payment, under all of the policies concerned for the whole of the period for which each of those policies is operative
B - represents the sum of the following under all of the policies concerned for the whole of the period for which each of those policies is operative:
| a) | the total amount of so much of those premiums as has been refunded as a result of a cancellation or variation of the policy; |
| b) | the total amount payable by the insurer as premiums under approved reinsurance policies in respect of the policies concerned; |
| c) | represents the total amount of consideration payable at the start of the policy by the insurer in respect of those reinsurance policies, subject to a maximum of 30 per cent of the said premiums, reduced by the total amount of any consideration payable to the insurer in respect of approved reinsurance policies under which its liabilities in respect of the policies concerned are reinsured: Provided that such reduction shall not exceed the total amount of consideration paid by the insurer in respect of those policies. |
| 4.1.3 | An insurer shall apply to the Authority to approve any other method than set out in paragraph 4.1.1 or 4.1.2 above and which the Authority is satisfied places a more appropriate value on the liabilities concerned, based on the incidence of the risk covered under the policy. |
| 4.1.4 | The Authority may by notice, in a particular case, or in general require an insurer to arrive at another minimum amount of its unearned premium provision by means of a calculation which is different from that set out in paragraph 4.1.1 or 4.1.2 above. |
| 4.2 | Method of calculating the outstanding claims reserve (OCR) |
| 4.2.1 | The outstanding claims reserve (OCR) is the amount which the insurer estimates will become payable in respect of claims incurred under policies which are reported but not yet fully paid, reduced by the amount which it estimates will be paid in respect of those claims under approved reinsurance policies. |
| 4.3 | Method of calculating the incurred but not reported reserve (IBNR) |
| 4.3.1 | The minimum amount referred to in section 32(1)(a)(ii) of the Act, shall be an amount equal to 7 per cent or such other percentage or method as the Authority may approve, or by notice require, in a particular case, or in general, of the total amount of all of the premiums payable to the insurer under policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the insurer as premiums under approved reinsurance policies in respect of the policies concerned. |
| 4.4 | Method of calculating the contingency reserve – |
| 4.4.1 | An amount equal to 10 per cent of the total amount of all of the premiums payable to the insurer under policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the insurer as premiums under any approved reinsurance policies in respect of the policies concerned; or |
| 4.4.2 | At any time during a period, not exceeding three years, as the Authority may approve, such lesser amount as the Authority may approve, subject to the conditions the Authority determines, if the Authority is satisfied that the insurer concerned - |
| a) | has incurred claims under policies of such extent and as a result of such extraordinary events that it is reasonable to meet all, or such part as the Authority may approve, thereof from the contingency reserve; and |
| b) | will be able to restore the reserve to the amount required in terms of subparagraph 4.4.1 within that approved period. |
| 4.5 | Method of calculating the unexpired risk provision |
| 4.5.1 | An unexpired risk provision if the insurer incurs an underwriting loss in the conduct of its short-term insurance business as reflected in any prescribed return in terms of this Act, and the insurer, in consultation with its auditor, considers it necessary to defray the possible cost of claims together with the costs to carry on the said business. |