RBS 2007 Annual Report Download - page 197

RBS Group • Annual Report and Accounts 2007 195
Financial statements
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. Claims development data provides information on the historical
pattern of reserving risk.
Accident year
2002 2003 2004 2005 2006 2007 Total
Insurance claims – gross £m £m £m £m £m £m £m
Estimate of ultimate claims costs:
At end of accident year 3,013 3,658 3,710 4,265 4,269 4,621 23,536
One year later 91 (140) (186) (92) (275) — (602)
Two years later 1 (106) (88) (147) — — (340)
Three years later (12) (55) (85) — — — (152)
Four years later (17) (47) ————(64)
Five years later (19) —————(19)
Current estimate of cumulative claims 3,057 3,310 3,351 4,026 3,994 4,621 22,359
Cumulative payments to date (2,893) (2,972) (2,825) (3,272) (2,947) (2,306) (17,215)
164 338 526 754 1,047 2,315 5,144
Liability in respect of prior years 202
Claims handling costs 120
Gross general insurance claims liability 5,466
Accident year
2002 2003 2004 2005 2006 2007 Total
Insurance claims – net of reinsurance £m £m £m £m £m £m £m
Estimate of ultimate claims costs:
At end of accident year 2,584 3,215 3,514 4,168 4,215 4,572 22,268
One year later 59 (106) (168) (67) (261) — (543)
Two years later (12) (103) (90) (161) — — (366)
Three years later (3) (53) (81) — — — (137)
Four years later (21) (44) ————(65)
Five years later (24) —————(24)
Current estimate of cumulative claims 2,583 2,909 3,175 3,940 3,954 4,572 21,133
Cumulative payments to date (2,473) (2,648) (2,721) (3,226) (2,771) (2,379) (16,218)
110 261 454 714 1,183 2,193 4,915
Liability in respect of prior years 168
Claims handling costs 120
Net general insurance claims liability 5,203
Insurance risk
The Group is exposed to insurance risk, either directly through
its businesses or through using insurance as a tool to reduce
other risk exposures.
Insurance risk is the risk of fluctuations in the timing, frequency
or severity of insured events, relative to the expectations of the
Group at the time of underwriting.
Underwriting and pricing risk
The Group manages underwriting and pricing risk through the
use of underwriting guidelines which detail the class, nature
and type of business that may be accepted; pricing policies
by product line and by brand; and centralised control of policy
wordings and any subsequent changes.
Claims management risk
The risk that claims are handled or paid inappropriately is
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
all claims are handled in a timely, appropriate and accurate
manner.
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.
Reinsurance of risks above the Group’s risk appetite is only
effective if the reinsurance premium makes economic sense
and the counterparty is financially secure. Acceptable
reinsurers are rated A- or better unless specifically authorised.