My first Publication ocbc_ar17_fullreport_english | Page 176

NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2017
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
2.16 INSURANCE CONTRACTS (continued)
General Insurance Fund contract liabilities
The Group issues short term property and casualty contracts
which protect the policyholders against the risk of loss of
property premises due to fire or theft in the form of fire or
burglary insurance contracts and/or business interruption
contracts; risk of liability to pay compensation to a third party
for bodily harm or property damage in the form of public liability
insurance contracts. The Group also issues short term medical
and personal accident general insurance contracts.
due from reinsurers. These amounts are estimated in a manner
consistent with the outstanding claims provision or settled
claims associated with the reinsurer’s policies and are in
accordance with the related reinsurance contract.
General insurance contract liabilities include liabilities for
outstanding claims and unearned premiums. Reinsurance assets are reviewed for impairment at each
reporting date or more frequently when an indication of
impairment arises during the financial year. Impairment
occurs when there is objective evidence as a result of an
event that occurred after initial recognition of the reinsurance
asset that the Group may not receive part or all outstanding
amounts due under the terms of the contract. The impairment
loss is recorded in the income statements. Gains or losses
on reinsurance are recognised in the income statements
immediately at the date of contract and are not amortised.
Ceded reinsurance arrangements do not relieve the Group from
its obligations to policyholders.
Outstanding claims provisions are based on the estimated
ultimate cost of all claims incurred but not settled at the balance
sheet date, whether reported or not, together with related claims
handling costs and reduction for the expected value of salvage and
other recoveries. Delays can be experienced in the notification and
settlement of certain types of claims, therefore, the ultimate cost
of these claims cannot be known with certainty at the balance
sheet date. The liabilities are calculated at the reporting date using
a range of standard actuarial claim projection techniques based
on empirical data and the current assumptions that may include
a margin for adverse deviation. The liabilities are not discounted
for the time value of money. No provision for equalisation or
catastrophe reserves is recognised. The liabilities are derecognised
when the contracts expire, are discharged or are cancelled. The Group also assumes reinsurance risk in the normal course
of business for life insurance and non-life insurance contracts
where applicable. Premiums and claims on assumed reinsurance
are recognised as revenue or expenses in the same manner
as they would be if the reinsurance were considered direct
business, taking into account the product classification of the
reinsured business. Reinsurance liabilities represent balances
due to reinsurance companies. Amounts payable are estimated
in a manner consistent with the related reinsurance contract.
Premiums and claims are presented on a gross basis for both
ceded and assumed reinsurance. Reinsurance assets or
liabilities are derecognised when the contractual rights
are extinguished or expire or when the contract is transferred
to another party.
The provision for unearned premiums represents premiums
received for risks that have not yet expired at the reporting date.
The provision is recognised when contracts are entered into and
premiums are charged. The provision is released over the term of
the contract and is recognised as premium income. 2.17 UNEXPIRED RISK RESERVE
The Unexpired Risk Reserve (“URR”) represents the unearned
portion of written premiums of general insurance policies,
gross of commission payable to intermediaries attributable to
periods after the balance sheet date. The change in provision
for unearned premium is taken to the income statements in
the order that revenue is recognised over the period of the risk
exposure. Further provisions are made for claims anticipated
under unexpired insurance contracts which may exceed the
unearned premiums and the premiums due in respect of
these contracts.
The valuation of general insurance contract liabilities at the
balance sheet date is based on best estimates of the ultimate
settlement cost of claims plus a provision for adverse deviation.
For both Singapore and Malaysia, as required by the local
insurance regulations, the provision for adverse deviation is
set at 75% level of sufficiency. For Singapore, the valuation
methods used include the Paid Claim Development Method,
the Incurred Claim Development Method, the Paid Bornhuetter-
Ferguson Method, the Incurred Bornhuetter-Ferguson Method
and the Expected Loss Ratio Method. For Malaysia, the valuation
methods used include the Paid Claim Development Method,
the Incurred Claim Development Method, the Paid Bornhuetter-
Ferguson Method, the Incurred Bornhuetter-Ferguson Method
and the Loss Ratio Method.
Reinsurance contracts
The Group cedes insurance risk in the normal course of business
for all of its businesses. Reinsurance assets represent balances
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OCBC ANNUAL REPORT 2017
URR is computed using the 1/24 th method and is reduced by the
corresponding percentage of gross direct business, commissions
and agency related expenses not exceeding limits specified by
regulators in the respective jurisdictions in which the insurance
entity operates.
2.18 SHARE CAPITAL AND DIVIDEND
Ordinary shares, non-cumulative non-convertible preference
shares and perpetual capital securities are classified as equity
on the balance sheet.