Quite often UPR (Unearned Premium Reserve) and URR (Unexpired Risk Reserve) are used interchangeably. This is acceptable usually since the basic assumption is that the premiums collected are adequate from a technical price perspective. When that assumption is not valid, the usual practice of equating the two will not work.
If all contracts coincide with accounting period, we would not have the issue of UPR or URR. But in real life the period of the contracts seldom coincide exactly with the accounting period. So there would be a part of the premium, corresponding to the unexpired portion of the risk, which is not yet earned and hence has to be provided as reserve – UPR. If the pricing is correct, this premium should be adequate to cover the unexpired portion of the risk. Again, in real life several pricing assumptions especially the claims ratios could undergo drastic changes. If the pricing is inadequate, the UPR provided would be insufficient to cover the unexpired part of the risk. Then an additional amount for unexpired risks would need to be provided.
URR is a forward looking assessment which is more logical to follow than the historical information based UPR. So in cases where the URR is found to be less than the UPR, the insurers could ideally reduce the provision. However, the usual practice is to provide full UPR from an accounting principles perspective. If the URR is found to be more than UPR, the reserves are inadequate to cover the unexpired risks and hence the insurer has to make additional provisions. This is technically called Additional Unexpired Risk Reserve – AURR.
URR = UPR + AURR
One needs to be a little careful here, since URR is used at times to depict the total Unexpired Risk Reserve and on some occasions to represent only the Additional Unexpired Risk Reserve.
