RBS 2006 Annual Report Download - page 99
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Please find page 99 of the 2006 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.RBS Group • Annual Report and Accounts 2006
98
Operating and financial review continued
Operating and financial review
Claims management risk
Claims management risk is the risk that claims are handled or
paid inappropriately. Claims are managed using a range of IT
system controls and manual processes conducted by
experienced staff. These, together with a range of detailed
policies and procedures ensure that claims are handled in a
timely, appropriate and accurate manner. The processes
include controls to avoid claims staff handling or paying claims
beyond their authorities, as well as controls to avoid paying
invalid claims. Loss adjustors are used to handle certain claims
to conclusion.
Reinsurance risk
Reinsurance is used to protect against the impact of major
catastrophic events or unforeseen volumes of, or adverse
trends in, large individual claims and to transfer risk that is
outside the Group’s current risk appetite.
The following types of reinsurance are used where appropriate:
•Excess of loss ‘per individual risk’ reinsurance to protect
against significantly large individual losses.
•Excess of loss catastrophic ‘event’ reinsurance to protect
against major events, for example, windstorms or floods.
•Quota share reinsurance to protect against unforeseen
adverse trends, where the reinsurer takes an agreed
percentage of premiums and claims.
•Other forms of reinsurance may be utilised according to
need, subject to approval by senior management or the
board as appropriate.
Reinsurance of risks above the Group’s risk appetite is only
effective if the reinsurance premium payable makes economic
sense and the counterparty is financially secure. Before entering
a contract with a new reinsurer, it must satisfy the Credit Risk
Approval process that uses information derived internally and
from security ratings agencies. Acceptable reinsurers are
rated at A- or better unless specifically authorised by the
RBS Insurance Group Board.
Reserving risk
Reserving risk relates to both premiums and claims.
It is the risk that reserves are assessed incorrectly such
that insufficient funds have been retained to pay or handle
claims as the amounts fall due, both in relation to those
claims which have already occurred in relation to the claims
reserves (including claims handling expense reserves)
or will occur in future periods of insurance (in relation to the
premium reserves).
a) Premium reserves
In respect of premium reserves, it is the Group’s policy to
ensure that the net unearned premium reserves are
adequate to meet the expected cost of claims and
associated expenses in relation to the exposure after the
balance sheet date. To the extent that the unearned
premium reserves, net of reinsurance and deferred
acquisition costs are inadequate, a liability adequacy
provision will be held.
b) 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, having
regard to actuarial estimates and the volatility observed and
expected in the claims in each class.
The Group’s policy is to hold appropriate levels of provisions,
typically in excess of the actuarial best estimate, for the major
classes of business.
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. This attention to data analysis is reinforced
by tight controls on costs and claims handling procedures.
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 (private and commercial)
Claims experience is 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 and use of vehicle
and area.
There are many sources of uncertainty that 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 risks.