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RBS Group • Annual Report and Accounts 2006
186
Notes on the accounts continued
2006 2005 2004
Earned Claims Loss Earned Loss Earned Loss
premiums incurred ratio premiums ratio premiums ratio
£m £m % £m % £m %
Residential property Gross 1,121 627 56 1,098 55 1,090 55
Net 1,061 624 59 1,037 56 990 58
Personal motor Gross 3,384 2,854 84 3,312 79 3,179 79
Net 3,279 2,802 85 3,257 80 2,976 79
Commercial property Gross 218 81 37 212 39 191 40
Net 198 76 38 193 40 173 42
Commercial motor Gross 90 62 69 102 53 93 76
Net 88 60 68 96 46 87 68
Other Gross 842 396 47 853 63 954 60
Net 833 409 49 761 67 827 59
Total Gross 5,655 4,020 71 5,577 70 5,507 69
Net 5,459 3,971 73 5,344 71 5,053 70
Claims reserves
It is the Group’s policy to hold undiscounted claims reserves
(including reserves to cover claims which have been incurred
but not 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 are used to accurately price and monitor
the risks accepted.
The following table indicates the diversity of risks underwritten
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, terms and conditions, 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 (personal and commercial)
Claims experience is quite variable, due to a wide range
of factors, but the principal ones are age, sex and driving
experience of the driver, type and nature of vehicle, use of
vehicle and area.
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 weather, the social, economic and
legislative environment and reinsurance failure risk.
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) 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. Liability
insurance is written on an occurrence basis, and is 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 and economic climate are a source
of uncertainty in the Group’s business interruption and general
liability accounts. Other sources of uncertainty are changes
in the law, or its interpretation, and reserving risk. Other
uncertainties are significant events (for example terrorist
attacks) and any emerging new heads of damage or 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 Risk management (continued)