An amount that an insurance company sets aside, on its the balance sheet, in addition to unearned premiums in connection with risks that will be borne by the insurance undertaking (under existing policies/ insurance contracts) after the end of the financial year (unexpired risks). The reserve/ provision provides a coverage for the risks relating to the insurance policies issued before the end of a respective year and remained effective after the balance sheet date. In other words, an insurer creates such a provision in order to meet all claims and expenses associated with effective insurance contracts in excess of the related unearned premiums and any premiums receivable on such contracts.
This reserve reflects the present value of loss and expense payments to be covered by premiums over the period from the valuation date to expiration on all effective policies (unexpired contracts) on the valuation date.
It is also referred to as a premium deficiency reserve.
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