RBS 2005 Annual Report Download - page 192

190
Notes on the accounts
Notes on the accounts continued
2005 2004
Earned Claims Loss Earned Claims Loss
premiums incurred ratio premiums incurred ratio
£m £m % £m £m %
Residential property Gross 1,098 602 55 1,090 599 55
Net 1,037 580 56 990 578 58
Personal motor Gross 3,312 2,603 79 3,179 2,506 79
Net 3,257 2,601 80 2,976 2,360 79
Commercial property Gross 212 82 39 191 77 40
Net 193 77 40 173 73 42
Commercial motor Gross 102 54 53 93 71 76
Net 96 44 46 87 59 68
Creditor Gross 157 87 55 143 74 52
Net 156 87 56 142 74 52
Other Gross 696 455 65 811 499 62
Net 605 426 70 685 414 60
Total Gross 5,577 3,883 70 5,507 3,826 69
Net 5,344 3,815 71 5,053 3,558 70
Claims reserves
It is the Group’s policy to hold undiscounted claims reserves
(including reserves to cover claims which have occurred but
not been reported (IBNR reserves)) for all classes at a
sufficient level to meet all liabilities as they fall due.
The Group’s focus is on high volume and relatively
straightforward products, for example home and motor. This
facilitates the generation of comprehensive underwriting and
claims data, which is used to monitor and accurately price the
risks accepted. This attention to data analysis is reinforced by
tight controls on costs and claims handling procedures.
The following table indicates the diversity of risks underwritten,
the frequency and severity of claims and the corresponding
loss ratios for each major class of business, gross and net of
reinsurance.
Frequency and severity of specific risks and
sources of uncertainty
Most general insurance contracts written by the Group are
issued on an annual basis, which means that the Group’s
liability extends for a 12 month period, after which the Group is
entitled to decline or renew or can impose renewal terms by
amending the premium or excess or both.
The following paragraphs explain the frequency and severity of
claims and the sources of uncertainty for the key classes that
the Group is exposed to:
a) Motor insurance contracts (private and commercial)
Claims experience is quite variable, due to a wide number
of factors, but the principal ones of these are age of driver,
type of vehicle and use.
There are many sources of uncertainty that will affect the
Group's experience under motor insurance, including
operational risk, reserving risk, premium rates not matching
claims inflation rates, the social, economic and legislative
environment and reinsurance failure risks.
b) Property insurance contracts (residential and commercial)
The major causes of claims for property insurance are theft,
flood, escape of water, fire, storm, subsidence and various
types of accidental damage.
The major source of uncertainty in the Group’s property
accounts is the volatility of weather. Weather in the UK can
affect most of the above perils. Over a longer period, the
strength of the economy is also a factor.
c) Commercial other insurance contracts
Other commercial claims come mainly from business
interruption and loss arising from the negligence of the insured
(liability insurance). Business interruption losses come from
the loss of income, revenue and/or profit as a result of
property damage claims. Liability insurance comprises
employers liability and public/products liability. Liability
insurance is written on an occurrence basis, and is subject
to claims over a substantial period of time, but where loss
was in existence during the life of the policy.
Fluctuations in the social and economic climate are a source
of uncertainty in the Group’s general liability account.
Other sources of uncertainty are changes in the law, or its
interpretation, and changes in the actuarial estimates
underlying long-term claims. Other uncertainties are
significant events (for example terrorist attacks) and any
emerging new heads of damage, types of claim that are not
envisaged when the policy is written.
The Group has no interest rate exposure from general insurance liabilities because provisions for claims under short term insurance
contracts are not discounted.
34 Financial instruments (continued)