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Premium and Catastrophe Risks

P&C insurance undertakes the obligation to indemnify the insured in case of claims, and in exchange, the insured pays a premium. A crucial factor contributing to the profitability of P&C insurance operations is the ability to accurately estimate claims and administrative costs and thereby correctly price the insurance contracts correspondingly.

Given the inherent uncertainty of P&C insurance there is a risk that the future claims are unexpectedly frequent and/or high. Examples include large fires, natural catastrophes such as severe windstorms and unforeseen increases in the frequency or the average size of small and medium-sized claims. Such deviations can be purely random, i.e. an effect of the inherent uncertainty of the claims cost. The deviations can also be the result of more systematic and permanent changes in e.g. inflation, legislation or exposures. Random deviations are significant in the Industrial insurance business, where claims could potentially be very large, e.g. a fire in a large factory. Systematic deviations to a larger degree affect the Private business line, which is characterised by a large number of small claims and consequently a lower degree of random variation.

Premium and Catastrophe Risk Management

The Underwriting Committee is responsible for the monitoring of compliance of the underwriting principles as defined by the Underwriting Policy (UW Policy). The UW Policy is the principal document for underwriting activities. It sets general principles, restrictions, limits and directions for the underwriting activities. The Board of Directors of If P&C approves the UW Policy at least annually.

The UW Policy is supplemented with detailed underwriting guidelines which outline how to conduct underwriting within each business area. These guidelines cover, among other things, tariff and rating models for pricing, guidelines in respect of standard conditions and manuscript wordings, as well as underwriting authorities, underwriting limits such as sums insured and lists risks that are not acceptable to undertake.

The business units manage underwriting risk on a day-to-day basis. Separate underwriting and pricing units are responsible for the tariffs and pricing of products related to the business area Private and smaller risks in the business area Commercial. In the business area Industrial and for more complex risks in the business area Commercial, the underwriting is based more on general principles and individual underwriting than strict tariffs. In general, pricing is based on statistical analyses of historical claims data and assessments of future developments of for instance claims inflation and claims frequency.

Given the large number of customers in P&C insurance and the fact that business is underwritten in different geographical areas and across several classes of insurance, the portfolio is well diversified. The degree of diversification is shown in the figure "Breakdown of gross premiums by business area and country, If P&C, 31 Dec 2010" and in the table "Technical provisions per product and country, If P&C, 31 Dec 2010".

Over 80 per cent of the premium income is related to the business areas Private and Commercial which are characterised by a large number of small claims and consequently a lower degree of random variation.

Despite the large degree of diversification, underwriting risk concentrations may still arise through for example exposures to natural disasters, such as winter storms and floods. The most exposed geographical areas to such disasters are Denmark, Norway and Sweden. In addition, single large claims can potentially have a significant impact on the result. The risk of severe outcomes is mitigated by purchasing reinsurance. Since 2003, a Nordic-wide reinsurance program has been in place in If P&C. In 2010 the retentions levels for different classes of insurance were between SEK 100 million (approximately EUR 11.2 million) and SEK 200 million (approximately EUR 22.3 million) per risk and SEK 200 million per event.

Guidelines for the purchase of reinsurance are stipulated in If P&C's Reinsurance Policy. The need and optimal choice of reinsurance is evaluated by use of the internal model and the cost of reinsurance should be favourable compared to the cost of capital. Other factors taken into account when purchasing reinsurance are result volatility and the impact on capital requirements (regulatory, economic and rating).

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