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Reserve Risk

Defining the technical provisions in P&C insurance always includes an element of uncertainty as the final number and sizes of incurred claims are not known. Claims are usually reported to If P&C with some delay and in many cases it takes additional time to determine the final indemnity.

The uncertainty of technical provisions is normally larger for new portfolios for which complete run-off statistics are not yet available and for portfolios that include long-tailed business. Examples of portfolios that include long-tailed business are Workers' Compensation (WC), Motor Third Part Liability (MTPL), Personal Accident, and Liability insurance.

What are technical provisions in P&C insurance?

Technical provisions are divided into provisions for unearned premiums and provisions for claims outstanding in the company's balance sheet. Provisions for unearned premiums are recognised in the balance sheet at the time contracts are incepting. These are intended to cover anticipated claims costs and operating expenses during the remaining time of insurance contracts in force. Provisions for claims outstanding on the other hand, are intended to cover the anticipated future payments of all claims incurred, including claims not yet reported to the company.

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The book value of technical provisions and the duration broken down by product and country is shown in table "Technical provisions per product and country, If P&C, 31 Dec 2010".

 

Technical provisions per product and country, If P&C, 31 Dec 2010

  Sweden Norway Finland Denmark Total

 

EURm

Duration

EURm

Duration

EURm

Duration

EURm

Duration

EURm

Duration

Motor

2,447

8.0

850

3.3

824

9.6

127

2.7

4,249

7.2

Workers' compensation

0

0.0

416

6.2

997

10.2

264

6.1

1,677

8.7

Liability

326

6.0

161

3.5

131

3.3

80

2.6

698

4.4

Accident

221

5.3

292

2.7

92

1.9

59

2.7

664

3.3

Property

399

1.3

586

1.1

183

0.9

117

0.8

1,285

1.1

Cargo

34

1.3

29

0.8

34

0.8

21

0.8

118

1.0

Total

3,426

6.7

2,334

3.1

2,262

8.4

670

3.7

8,691

5.9

 

In product lines such as MTPL and WC, legislation and hence the product features and risks, differ significantly between countries. For instance, some of the Finnish, Swedish and Danish provisions for these lines include annuities which are sensitive to changes in mortality assumptions and discount rates. The proportion of the technical provisions related to MTPL and WC is 59 per cent.

The technical provisions for many lines of business are sensitive to changes in inflation. Inflation risk refers to the risk that technical provisions have to be increased due to higher inflation than originally expected. The anticipated inflation trend is observed in all provisions, but is of highest importance for claims settled over a long period of time. For long-tailed business, such as MTPL and WC, assessments are made regarding the expected claims inflation. These are based on external assessments of the inflation trend (e.g. consumer price index and wage index) combined with If P&C's own evaluation of cost increases for various types of claims. Inflation risk in the technical provisions is taken into account in the investment strategy of If P&C. The sensitivity towards inflation differs between countries due to the different national rules.

The sensitivity of If´s technical provisions to an increase in inflation, an increase in life expectancy and a decrease in the discount rate is presented in the table "Sensitivities of technical provisions, If P&C, 2010".

Sensitivities of technical provisions, If P&C, 2010

Technical provision item

Risk factor Change in risk parameter Country Effect EURm

Nominal reserves

Inflation increase

Increase by 1%-point

Sweden

250.2

     

Denmark

16.0

     

Norway

87,8

     

Finland

25.4

Discounted reserves (annuities and part of Finnish IBNR)

Decrease in discount rate

Decrease by 1%-point

Sweden

56.9

     

Denmark

8.4

     

Finland

153.7

Annuities

Decrease in mortality

Life expectancy increase by 1 year

Sweden

10.4

     

Denmark

0.4

     

Finland

29.0

If P&C's technical provisions are further analysed by claims year before and after reinsurance in the claims cost trend tables. These are disclosed in the Note 27 to the Financial Statements.

Reserve Risk Management

The Board of Directors of If P&C approves guidelines governing the calculation of technical provisions. If P&C's Chief Actuary is responsible for developing and implementing guidelines on the calculation of technical provisions and for assessing whether the overall level of provisions is sufficient. The Chief Actuary issues a report on the adequacy of technical provisions at least quarterly, which is submitted to the Board of Directors, If's Risk Control Committee and If P&C's CEO.

The Actuarial Committee is a preparatory and advisory board for If P&C's Chief Actuary. The committee makes recommendations on policies and guidelines for technical calculations. It also monitors technical provisions and gives advice to If P&C's Chief Actuary regarding their adequacy.

Analyses of the adequacy of technical provisions are made by If P&C's actuaries. The actuaries monitor the levels of technical provisions on a continuous basis in order to ensure that they comply with the established guidelines. The actuaries also develop methods and systems to support these processes.

Actuarial estimates are based on historical claims data and any other information that is available at the closing date. Factors that are monitored are e.g. loss development trends, the level of unpaid claims, changes in legislation, legal cases and economic conditions. The methods used in calculating technical provisions include the Chain Ladder and the Bornhuetter-Fergusson methods combined with projections of number of claims and average claim costs.

Sensitivity of underwriting result and hence underwriting risk is presented by changes in certain key figures in the table "Sensitivity test of underwriting result, If P&C, 31 Dec 2010 and 31 Dec 2009".

Sensitivity test of underwriting result, If P&C, 31 Dec 2010 and 31 Dec 2009

 

    Effect on pretax profit, EURm

Key figure

Current level (2010)

Change in
current level

2010

2009

Combined ratio, business area Private

93.0%

+/- 1 percentage point

+/- 21

+/- 20

Combined ratio, business area Commercial

93.5%

+/- 1 percentage point

+/- 12

+/- 11

Combined ratio, business area Industrial

90.6%

+/- 1 percentage point

+/- 4

+/- 4

Combined ratio, business area Baltics

93.4%

+/- 1 percentage point

+/- 1

+/- 2

Premium level

3,894 +/- 1%

+/- 39

+/- 36

Claims frequency

2,943 +/- 1%

+/- 29

+/- 27

Ceded reinsurance premium

202 +/- 10%

+/- 20

+/- 22

 

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