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RBS Group • Annual Report and Accounts 2006
Operating and financial review
b) Property insurance contracts (residential and commercial)
The major source of uncertainty in the Group’s property
accounts is the volatility of weather. Over a longer period,
the strength of the economy is also a factor. There are many
other sources of uncertainty which include operational and
reinsurance issues.
c) Other commercial 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
includes employers liability and public/products liability.
As liability insurance is written on an occurrence basis,
these covers are still subject to claims that are identified
over a substantial period of time, but where the loss event
occurred during the life of the policy.
Fluctuations in the social, economic and legislative climate
are a source of uncertainty in the Group’s general liability
account, and in particular court judgements and legislation,
significant events (for example terrorist attacks), any emerging
new heads of damage and types of claim that are not
envisaged when the policy is written.
Life business
The three regulated life companies of the Group, National
Westminster Life Assurance Limited, Royal Scottish Assurance
plc and Direct Line Life Insurance Company Limited, are
required to meet minimum capital requirements at all times
under the Financial Service Authority’s Prudential Sourcebook.
The capital resources covering the regulatory requirement are
not transferable to other areas of the Group. To ensure that the
capital requirement is satisfied at all times, each company holds
an additional voluntary buffer above the regulatory minimum.
The Group is not exposed to price, currency, credit, or interest
risk on unit linked life contracts but it is exposed to variation in
management fees. A decrease of 10% in the value of the assets
would reduce the asset management fees by £5 million per
annum (2005 – £5 million). The Group also writes insurance
contracts with minimum guaranteed death benefits that expose
it to the risk that declines in the value of underlying investments
may increase the Group’s net exposure to death risk.
Frequency and severity of claims – for contracts where
death is the insured risk, the most significant factors that could
increase the overall frequency of claims are epidemics or
widespread changes in lifestyle, resulting in earlier or more
claims than expected.
For contracts where survival is the insured risk, the most
significant factor is continued improvement in medical science
and social conditions that would increase longevity.
For contracts with fixed and guaranteed benefits and fixed
future premiums, there are no mitigating terms and conditions
that reduce the insurance risk accepted. Participating
contracts can result in a significant portion of the insurance
risk being shared with the insured party.
Sources of uncertainty in the estimation of future benefit
payments and premium receipts – the Group uses base tables
of standard mortality appropriate to the type of contract being
written and the territory in which the insured person resides.
These are adjusted to reflect the Group’s experience, mortality
improvements and voluntary termination behaviour.